Present: All the Justices 

MILDRED H. ASHMORE 

OPINION BY JUSTICE A. CHRISTIAN COMPTON 

v. Record No. 952137 September 13, 1996 

HERBIE MOREWITZ, INC., ET AL. 

HERBIE MOREWITZ, INC., ET AL. 

v. Record No. 952155 

MILDRED H. ASHMORE 

 FROM THE CIRCUIT COURT OF THE CITY OF NEWPORT NEWS 

Robert W. Curran, Judge 

 In this creditors' rights controversy arising from a real 

estate sales transaction, the principal issues are whether fraud 

has been established in connection with the execution of a 

subordination agreement and, if so, whether application of the 

third party beneficiary statute, Code § 55-22, affects the 

priority of liens. A subsidiary issue deals with the nature of 

the fraud. 

 In April 1994, plaintiff Mildred H. Ashmore filed a bill of 

complaint against defendants Herbie Morewitz, Inc., Herbert 

Morewitz, II, Statewide, Inc., Raymond H. Suttle, Jr., Trustee, 

and Richard M. Macaluso, Trustee. The plaintiff alleged she is a 

widow over 70 years of age living alone at the Newport News home 

formerly owned jointly with her late husband. Plaintiff asserted 

she had been living on a fixed income "barely adequate to meet 

her needs" and, in 1992, decided to convert the subject property 

into an income producing asset. The plaintiff alleged she 

decided to find a purchaser for the property who would buy it "on 

seller financed terms which would provide her with a stream of 
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income from note payments secured by a purchase money deed of 

trust on the Property and at the same time allow her to remain in 

the Property at a reasonable monthly rental for a period of 

time." 

 Plaintiff further alleged that, based on prior contact with 

defendant Herbert Morewitz, II, "she believed him to be an astute 

and experienced real estate investor who regularly bought and 

sold properties as part of his business." Plaintiff also alleged 

that, responding to her request, Morewitz came to her home to 

discuss the matter. He presented her with a real estate purchase 

contract setting forth terms of a proposed sale of the property 

to defendant Herbie Morewitz, Inc., "a corporation solely owned 

and controlled by Morewitz." 

 The plaintiff alleged that, in accord with the contract, she 

executed and delivered a deed of bargain and sale dated in 

November 1992 conveying the property to Herbie Morewitz, Inc. 

(hereinafter, the corporation). At the same time, the 

corporation made and delivered a purchase money promissory note 

in the sum of $82,000 payable to the plaintiff's order. This 

note was secured by a first lien purchase money deed of trust 

made by the corporation conveying the property in trust to 

defendant Suttle and another as trustees to secure payment of the 

note. The deed and deed of trust were duly recorded. 

 The plaintiff further alleged that Morewitz "assured" her 

that she would always have a first lien deed of trust on the 
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property as security for payment of the note. She also alleged 

that Morewitz never asked her to subordinate the deed of trust to 

a later deed of trust on the property. 

 The plaintiff further alleged that she "happened to be in 

Morewitz's office" on March 24, 1993 when he said "he had `sold 

the paper' related to the Property and needed for her to sign a 

document connected with that activity." She asserted Morewitz 

presented her with a single sheet of paper bearing a line for her 

signature and containing two blank acknowledgement forms. She 

alleged Morewitz did not tell her that the sheet, which she 

signed, was actually the last page of a three-page document. 

 The plaintiff alleged she later learned, when the 

corporation became delinquent in the payment of the note, that 

the document was an agreement in which she consented to the 

subordination of the lien of the purchase money deed of trust to 

the lien of another deed of trust on the property from the 

corporation to defendant Macaluso, Trustee, securing a note made 

by the corporation in the principal sum of $52,500 payable to 

defendant Statewide, Inc. Both the subordination agreement and 

the other deed of trust had been recorded. 

 The plaintiff alleged the subordination agreement was void 

due to fraud of Morewitz and the corporation. She further 

alleged that Statewide was a third party beneficiary of the 

purported agreement and, as such, takes its interest in the 

property subject to any defenses which she may have against the 
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corporation. She asserted that Statewide's rights under the 

purported agreement can rise no higher than the rights of the 

corporation under such instrument. 

 In the prayer to the bill of complaint, the plaintiff asked 

that the subordination agreement be declared void and that she be 

declared the holder of the first lien deed of trust on the 

property. 

 In a responsive pleading, Morewitz, "individually and as 

President & Agent of Herbie Morewitz, Inc.," denied the 

allegations of fraud. He affirmatively asserted that he advised 

the plaintiff "to seek counsel if she did not understand the 

subordination agreement" and that trustee Suttle "verified" with 

the plaintiff "that she had, in fact, signed [the] agreement and 

understood its content." Morewitz asked the court to dismiss the 

bill of complaint, issue an order allowing him access to the 

property to facilitate its sale, and order the plaintiff to 

vacate the property. 

 The trial court considered testimonial and documentary 

evidence in an ore tenus hearing in January 1995. Subsequently, 

in an October 1995 final decree, the court ruled that the 

plaintiff's signature to the subordination agreement was obtained 

by the fraud of Morewitz acting on behalf of the corporation, 

that the fraud made the agreement voidable, that no evidence was 

produced to establish any knowledge of the fraud by Statewide, 

and that the plaintiff's request to be declared holder of a first 
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lien deed of trust on the property was denied. 

 We awarded separate appeals to the plaintiff, on one hand, 

and to the corporation and Morewitz, on the other, consolidating 

them for argument. The plaintiff contends the trial court 

erroneously determined that even though her execution of the 

subordination agreement was induced by the fraudulent 

misrepresentations of Morewitz, this rendered the agreement 

voidable rather than void. The plaintiff also contends the trial 

court erroneously found that the rights of Statewide under the 

agreement were not affected by Morewitz's fraud and that 

Statewide did not take its interest in the property subject to 

the defense of fraud which plaintiff had against the corporation. 

 In the cross appeal, the corporation and Morewitz contend 

the trial court erred in finding that fraud had been proved by 

clear and convincing evidence. 

 The record on appeal does not include a verbatim transcript 

of the testimony at trial, only a Rule 5:11(c) written statement 

of facts in lieu of a transcript. Many of the relevant facts 

were disputed but, applying settled appellate principles, we 

accord the judgment of the trial court, including the court's 

findings of fact that are supported by credible evidence, a 

presumption of correctness. Thus, we shall recite such facts as 

found by the chancellor. 

 First, we shall address the issue of law raised in the cross 

appeal, that is, whether the plaintiff proved fraud by the 
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requisite clear and convincing evidence. 

 The parties' evidence essentially supported the allegations 

made in their pleadings. The plaintiff established that "on 

several occasions" after the closing of the sale of the property 

to the corporation, Morewitz told her "that he might want to 

borrow against the Property, or `sell the paper,' but assured her 

that her position would not be changed." In a letter dated March 

18, 1993, Morewitz wrote plaintiff confirming "our conversation 

in regards to your possible need to occupy the house beyond [a] 

one year term," stating he was "agreeable" to extending her 

occupancy "to whatever date you're comfortable with." In a 

second paragraph, Morewitz wrote: "Also, from time to time, I 

borrow against properties that I own to expand my investment 

enterprise. I may borrow against [the subject property] but 

please know this will not change your position at all." Morewitz 

later testified this statement "was in reference to her continued 

occupancy of the property and to verify that she would continue 

to receive monthly payments." 

 Thereafter, in March 1993, Morewitz "sought a loan" for the 

corporation from Statewide, which advised him that "such a loan" 

would be made if he "could give Statewide a first lien deed of 

trust on the Property as security for the loan." According to 

the statement of facts, Morewitz then took a subordination 

agreement, prepared by Statewide's attorney, to the plaintiff, 

telling her "that the instrument was just a routine document 
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which would enable him to `sell the paper' related to the 

Property." The plaintiff, who was "unsophisticated in such 

matters," relied on Morewitz and executed the subordination 

agreement. She testified that the pages of the document "were 

not attached to each other and she signed the signature page 

without reading the document." During cross-examination, the 

plaintiff, when asked, "Did you read the document at all before 

signing it?" replied, "I read it, but not carefully." 

 Trustee Suttle, who testified Morewitz had written him a 

memo suggesting he call the plaintiff "to ensure that she 

understood the agreement," stated that when the document was 

presented for his signature, he telephoned the plaintiff and 

explained to her "that the effect of this subordination agreement 

was that she would now be in a second lien position, not first." 

 Disputing this testimony, the plaintiff testified she never 

spoke to Suttle about "subordinating her deed of trust to another 

deed of trust." The chancellor found the telephone call took 

place but that the plaintiff "failed to understand the legal 

effect of the document because of the fraudulent 

misrepresentations which Morewitz had previously made to her." 

 The plaintiff also established that she later found in her 

files the draft of an unsigned subordination agreement like the 

document she signed. The unsigned document, however, contained 

"an extra sentence" stating, "Notice: The original agreement 

between Herbie Morewitz, Inc. and Mildred H. Ashmore is not 
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diminished or affected by this document." The plaintiff did not 

know how or when the document came into her possession, stating 

"it may have come from Mr. Morewitz's office." The plaintiff 

admitted she did not rely on the extra sentence when she signed 

the agreement. 

 Morewitz testified that the extra sentence appeared to be on 

a "working" or "rough draft" copy of the agreement, and that he 

did not recall making any alteration to the copy prepared by 

Statewide's attorney. According to the statement of facts, 

Morewitz "did not absolutely deny" making the alteration, 

"because he could not recall this sentence at all." 

 A party seeking to establish fraud must prove by clear and 

convincing evidence a false representation, of a material fact, 

made intentionally and knowingly, with the intent to mislead, 

reliance by the party misled, and resulting damage to such party. 

Thompson v. Bacon, 245 Va. 107, 111, 425 S.E.2d 512, 514 (1993). 

 Clear and convincing evidence is that degree of proof which will 

produce in the mind of the trier of facts a firm belief or 

conviction concerning the allegations sought to be established. 

Fred C. Walker Agency, Inc. v. Lucas, 215 Va. 535, 540-41, 211 

S.E.2d 88, 92 (1975). Viewing the facts, as we must, in the 

light most favorable to the plaintiff who prevailed below on this 

issue, we hold that the plaintiff's proof burden has been carried 

on the fraud question. 

 There was credible, clear and convincing evidence to support 
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the trial court's finding that Morewitz, intentionally and 

knowingly with the intent to mislead, falsely represented 

material facts to the plaintiff, that is, her first lien 

"position" would not be changed if he "sold the paper" and the 

subordination agreement "was just a routine document" enabling 

him to "sell the paper." Further, such evidence supports the 

court's implicit findings that plaintiff relied on the false 

representation and was relegated to a second lien position to her 

detriment as the result of executing the subordination agreement. 

 Thus, we hold there is no merit in the cross appeal. 

 Turning next to the plaintiff's contention that the nature 

of the fraud made the agreement void, and not voidable, we hold 

the trial court correctly ruled the agreement was voidable. 

 When a promisor knows what is being signed but the 

promisor's consent is induced by fraud, mutual consent is present 

and a contract is formed, which, because of the fraud, is 

voidable. In other words, "the act of the defrauded person is 

operative though voidable." 12 Williston on Contracts § 1488, at 

332 (3d ed. 1970). 

 On the other hand, if the fraud operates at the inception of 

the agreement so that the promisor actually does not know what is 

being signed, or does not intend to enter into a contract at all, 

mutual assent is lacking and the act of the promisor is void; the 

purported agreement may be disregarded without the necessity of 

rescission. Id. See Elam v. Ford, 145 Va. 536, 545, 134 S.E. 
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670, 672 (1926). 

 In the present case, the trial court found that the 

plaintiff knew she was signing a subordination agreement, but 

that she would not have so acted without Morewitz's 

misrepresentations regarding its legal effect on her position of 

priority. The court thus found, obviously with the foregoing 

principles in mind, "that this is the case where the act of the 

defrauded person is operative though voidable." There is 

credible evidence to support such finding. 

 Finally, we address the plaintiff's alternative argument 

that, even if the trial court correctly ruled the agreement is 

voidable, the court nonetheless erred in refusing to apply Code 

§ 55-22 and to rule Statewide took its interest in the property 

subject to the defense of fraud that she had against the 

corporation. We agree with the plaintiff. 

 Code § 55-22, the third-party beneficiary statute, provides: 

 "An immediate estate or interest in or the benefit of a 

condition respecting any estate may be taken by a 

person under an instrument, although he be not a party 

thereto; and if a covenant or promise be made for the 

benefit, in whole or in part, of a person with whom it 

is not made, or with whom it is made jointly with 

others, such person, whether named in the instrument or 

not, may maintain in his own name any action thereon 

which he might maintain in case it had been made with 

him only and the consideration had moved from him to 

the party making such covenant or promise. In such 

action the covenantor or promisor shall be permitted to 

make all defenses he may have, not only against the 

covenantee or promisee, but against such beneficiary as 

well." 

This statute enables a third party to take an interest under an 
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instrument, although not a party to it, if the promise is made 

for the third party's benefit and the evidence shows that the 

contracting parties clearly and definitely intended to confer a 

benefit upon such third party. Kelley v. Griffin, 252 Va. 26, 

29, 471 S.E.2d 475, 477 (1996). 

 In the present case, the evidence is clear that the 

subordination agreement between the plaintiff and the corporation 

is intended to confer a benefit upon Statewide, a nonparty. 

Under that agreement, Suttle as trustee and plaintiff as 

beneficiary of the November 1992 deed of trust agreed that the 

lien of that deed of trust shall be subordinated to and in favor 

of the other deed of trust, dated in March 1993, securing the 

debt to Statewide, which actually is named in the body of the 

subordination agreement. Thus, under Code § 55-22 Statewide 

could enforce the subordination agreement against the plaintiff. 

 But the last sentence of Code § 55-22 further provides that 

the plaintiff, as covenantor or promisor of the instrument, shall 

be permitted to make all defenses she may have against Statewide, 

the third-party beneficiary. In other words, the third-party 

beneficiary's rights under the instrument, according to the 

statute, can rise no higher than the rights of the corporation, 

the covenantee or promisee under the instrument. Thus, we hold 

that Statewide took its interests under the subordination 

agreement subject to the plaintiff's right to rescind the 

agreement because of Morewitz's fraud, even though Statewide had 
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no knowledge of the fraud. 

 Accordingly, we will affirm so much of the final decree 

which finds that the plaintiff's signature on the subordination 

agreement was obtained by the fraud of Herbert Morewitz, II, 

acting on behalf of Herbie Morewitz, Inc., and which finds that 

the fraud made the agreement voidable. Parenthetically, we find 

no merit in a contention made by the corporation and Morewitz 

that the form of this portion of the decree is erroneous. 

 We will reverse the remainder of the final decree. We will 

enter final judgment here setting aside the subordination 

agreement and declaring the plaintiff to be the holder of a first 

lien deed of trust on the subject property. 

 Record No. 952137 - Affirmed in part,

 reversed in part, and

final judgment. 

 Record No. 952155 - Affirmed.